What taxes do we need to pay as a startup in the UK?

startup in the UK

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    Running a startup isn’t everyone’s cup of tea, and it involves many moving parts, one of which is taxes. The kind of tax you pay when you operate a startup and how you pay it will rely on your firm’s business structure.

    A sole trader’s tax bill will vary from a partnership or a limited company. Learn how these taxes function when you manage a startup, from capital gains tax to VAT and corporation tax to capital allowance.

    Table of contents

    What taxes do I need to pay as a startup?

    1. Business rates
    Business rates are due on most business premises.

    Business rates are not usually due if you work from home and use a small portion of your home (such as one room).

    Business rates are usually due if a sizable portion of your property is used for business purposes (such as a shop with living quarters above it).

    The amount of business rates is linked to the property’s value, which can increase if real estate prices increase in your region.

    You can evaluate how much amount yours will be using HMRC’s calculator.

    However, if your bill rises, it will do so gradually, thanks to transitional relief.

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    2. Employers’ National Insurance contributions
    You will pay NICs on their salaries if you hire employees. These are defined as ‘secondary Class 1 NICs’ and are distinct from ‘primary Class 1 NICs’, which are made by staff through PAYE.

    You must also pay these contributions on most employee benefits (e.g., private medical insurance, company cars) and expenses claimed by staff.

    The amount is generally 15.05% of the benefit and earnings, though there are different exemptions for certain workers, like those making £242 or less per week.

    Qualifying businesses can use an employment allowance, currently £5,000 per tax year.

    3. VAT
    Value Added Tax (VAT) is a consumption tax introduced to the cost of a product or service.

    Businesses don’t automatically register for VAT, and you don’t start collecting VAT unless your annual revenue exceeds the VAT threshold, currently £85,000.

    It is usually paid quarterly, with VAT returns submitted to HMRC within 1 month and 7 days of the end of each quarter.

    You must file a quarterly return if registered for VAT, even if you have no VAT to reclaim or pay.

    4. Dividend tax
    You can pay dividends to yourself if you own shares in a company. The first £2,000 are tax-free until 2022-23, £1,000 until 2023-24, and £500 after that.

    You will have to pay a dividend tax if you receive more than this. Depending on your income tax bracket, you’ll pay a specific rate.

    Basic-rate taxpayers will pay 8.75% in 2022–2023; higher-rate taxpayers will pay 33.75%, and additional rate taxpayers will pay 39.35%.

    These rates had increased from 2021–2022, when basic-rate taxpayers were charged 7.5%, to 32.5% for higher-rate and 38.1% for additional rate taxpayers.

    If dividends are your only source of income, you can use both your personal and dividend allowances.

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      5. Capital Gains Tax (CGT)
      CGT is payable when you sell anything for a profit. For individuals, this refers to possessions. For startup owners, it’s paid if you give away or sell shares, assets, or your whole company.

      Your individual income tax rate will determine the amount you pay; basic-rate taxpayers pay 10%, while higher- and additional rate taxpayers pay 20%. When selling a property other than your main home, the rate increases to 18% for basic-rate payers and 28% for higher- or additional-rate payers.

      Remember that capital gains will be included in your yearly income, so a large profit can push you to fall into a higher tax bracket. To know how much you’ll pay on the sale of your company, you can take the sales price, subtract what you paid for it, any investments you made in the business, and any cost associated with buying or selling it. Then you are left with the gains.

      Through this, you can deduct personal capital gains allowance. Individuals can earn up to £12,300 before taxes in 2022–23, £6,000 in 2023-24, and £3,000 in 2024-45. It was the same before 2021–2022.

      6. Corporation tax
      Corporation tax is the tax on a company’s profits over the fiscal year. It is due within nine months and one day after your company’s accounting period ends.

      The UK’s most popular financial year end is March 31, which states you must pay corporation tax on January 1.

      The corporate tax rate is currently 19%, increasing to 25% next year. You can avoid penalties by submitting your corporate tax on time.

      Final thoughts

      Establishing your own business is a genuinely exciting life decision since it allows you to choose your clients and execute your ideas.

      On the other hand, failure to understand the startup tax will have significant consequences when the taxation season arrives.

      Many of the major expenses of running your business (including stock purchases, employee salaries, and business travel) are tax-deductible, which means you won’t owe taxes on the money spent on these costs.

      Effective spending management can significantly enhance your cash flow.

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